Peter Hannam

Existing economic models “grossly underestimate” the costs of global warming, undermining the urgency for deep cuts in greenhouse gas emissions, according to a new paper by leading UK climate change economist Lord Nicholas Stern.

The risks are in fact likely to be so large that a globally coordinated carbon price of $US32-$US103 ($34-$110) per tonne of emissions is needed as soon as 2015 to prevent the temperature increase from exceeding 2 degrees of pre-industrial age levels, said Lord Stern and co-author Simon Dietz, from the UK’s Grantham Research Institute.

Within two decades, the carbon price will need to almost triple in real terms to $US82-$US260 a tonne, the two researchers say in their paper to be published in The Economic Journal.

The authors modified the main model used by economists since 1991 to assess the likely effects of climate change. Developed by Yale Professor Bill Nordhaus in 1991, the model has served as a basis for damage estimates, including the recent Fifth Assessment Report by the UN’s Intergovernmental Panel on Climate Change.

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The IPCC report in March noted estimates of annual losses from a further rise of 2 degrees would be between 0.2-2 per cent of GDP, although it added the results were “incomplete” and “more likely than not” to exceed that level.

Dr Dietz said the overly simplified formula used by the standard model “implausibly” indicates global GDP would only be halved if average temperatures rose 18 degrees “even though such warming would likely render the Earth uninhabitable for most species, including humans”.

The revised model by Dr Dietz and Professor Stern takes into account the likelihood that the ability to generate new wealth would be affected by extreme weather and other impacts from climate change, such as the destruction of coastal or water infrastructure. By contrast, the current model in use only accounts for effects on output rather than the capital itself.

Professor John Quiggin from the University of Queensland welcomed the report: “I have long been concerned that the (existing) model greatly underestimates the costs of extreme global warming of 4 degrees or more, which remains likely unless stronger global action is taken to reduce CO2 emissions.”

The new report comes after Prime Minister Tony Abbott wrapped up his global trip with a speech in Texas over the weekend in praise of fossil fuels, particularly coal: "Australia should be an affordable energy superpower, using nature's gifts to the benefit of our own people and the wider world."

Australia’s carbon price, now at $24.15 a tonne, is likely to be scrapped when the new Senate sits month, next fulfilling a vow Mr Abbott took to the elections in 2010 and 2013.